Waste Services Inc. - Ruling, April 2, 1993

Ruling, April 2, 1993

In the Matter of
the Alleged Violation of Articles 15, 25 and 27 of the
New York State Environmental Conservation Law, and 6 NYCRR Parts 360, 608, 661
by

Waste Services, Inc.

Respondent.

RULING

Case Nos.
R2-3620-91-04
R2-3660-91-05
R2-3663-91-05
R2-0392-92-09

Proceedings

By Notice of Motion and affidavit of Paul D. Casowicz, Esq., dated February 23, 1993 and returnable March 5, 1993, Respondent moved for a protective order vacating the Department's February 19, 1993 dated demand for the production of documents.

On the record at hearing on February 24, 1993, Staff's motion to amend the complaint to add certain allegations to which its second document request was related, was denied. The parties agreed that with such ruling, issues related to the second document request were moot; thus only the first request is considered herein. Brief arguments on the first discovery request were placed on the record on February 24, 1992.

Staff filed an affidavit dated March 4, 1993, in opposition to Respondent's motion for a protective order. Staff's affidavit was received at the Office of Hearings March 11, 1993. This matter is now ripe for determination.

Discussion

The Notice to Produce:

Staff requested production of:

"1. Federal and state tax returns filed by Waste Services, Inc. for calendar years 1987 through 1992. (In the alternative, prepared profit and loss statements for each year contained in the aforementioned period certified as accurate by a certified public accountant may be supplied)."

Respondent's position:

Respondent seeks that Staff's Notice to Produce be vacated.

Respondent contended that the tax returns were "non-relevant" and that they are normally regarded as confidential documents. "There production in this case would not only be impermissibly intrusive, but there has been no showing of need for these documents."

Respondent argued that Staff made no showing how the tax returns from the entity could be used to establish economic gain or loss from the operation of the site, and that disclosure of the tax returns would be an intrusion on Respondent's privacy.

Staff's position:

Staff wants the tax returns to establish economic gain derived by Respondent corporation from alleged illegal operations conducted at the site, one of the components in penalty calculation described in the DEC Commissioner's Enforcement Directive issued to Staff on June 20, 1990 (the "Civil Penalty Policy"). Staff thought it would be difficult to properly calculate penalties without tax returns or other documents that would establish Respondent's profits.

Citing the Roth and Corcoran cases (see below), Staff acknowledged that tax returns are ordinarily regarded as confidential documents, but argued that they are discoverable on a showing of relevance to issues in the particular case, and that the particular returns sought are relevant and material to the penalty calculation herein.

Analysis:

Uniform Enforcement Hearing Procedures at 6 NYCRR 622.8(a) states that "[t]he scope of discovery shall be as broad as that provided in the CPLR." CPLR 3101 states that "[t]here shall be full disclosure of all evidence material and necessary in the prosecution or defense of an action ..." "The words 'material and necessary', are ... to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity. The test is one of usefulness and reason." Allen v Crowell-Collier Publishing Co. 21 NY2d 403, 406 (1968). "The purpose of disclosure procedures ... is to advance the function of a trial to ascertain truth and to accelerate the disposition of suits ... [i]f there is any possibility that the information is sought in good faith for possible use as evidence-in-chief or in rebuttal or for cross examination, it should be considered 'evidence material ... in the prosecution or defense.'" id. 407 (quoting various other authorities).

In Corcoran v Ardra Ins. Co. Ltd., 166 AD2d 250, 564 NYS2d 106, 107 (1st Dept. '90), documents subject to a document request made by an insurance liquidator in a suit to recover assets of the liquidated insurer that were not specifically objected to, such as individual income tax returns, personal financial records, and financial books and accounting records of alleged "shell" corporations, were found by the court to be sufficiently relevant and necessary to issues to be the proper subjects of discovery. It must be noted at this point in the analysis that the Respondent, here, has made specific objection to disclosure.

"Unless there is a strong showing of necessity, the production of tax returns, because of their confidential and private nature, is not favored. Matthews Industrial Piping Co., Inc. v Mobil Oil Corp. 114 A.D.2d 772, 495 N.Y.S.2d 35." Roth v American Colonial Insurance Co., 159 AD2d 370; 553 NYS2d 13, 14 (1st Dept. '90). (In Roth, an action by mortgagees against the owner and insurer to recover for fire loss at premises, no basis was shown for discovery of mortgagees' tax returns, which did not appear to be relevant to the issues in the case.)

In Matthews Industrial Piping Co., Inc. v Mobil Oil Corp. 114 AD2d 772 (cs 1), 495 NYS2d 35 (1st Dept. '85), the court stated the following: "The disclosure of tax returns is disfavored due to their confidential and private nature. Consequently, a party seeking to compel their production must make a strong showing of overriding necessity. An examination of the record herein does not indicate that defendant has sufficiently demonstrated that the information contained in plaintiff's tax returns is indispensible to the instant litigation and unavailable from other sources." (italics added).

Two cases where the requisite showing apparently was made are Kornblatt and Krauss (below), however, the manner in which discovery was permitted to take place reveals reluctance by the courts to simply require that tax returns be turned over.

Kornblatt v Jaguar Cars, Inc., 172 AD2d 590 (2nd Dept., 1991), was an action to recover the purchase price, or replacement, of a motor vehicle under the "Lemon Law." To recover under the Lemon Law, one must be a "consumer" under that statute that uses the vehicle primarily for personal, family or household use. Defendant moved for discovery and inspection of income tax returns of a corporation (the purchaser of the car and of which plaintiff was the president and sole custodian of financial records) to determine if and to what extent the vehicle's depreciation had been claimed as a business deduction (indicative of the car's use and plaintiff's status as a "consumer"). The court held that the lower court's allowing discovery of the tax returns was proper, particularly when discovery was limited to disclosure of the relevant schedules concerning depreciation of the automobile as a business deduction. Defendant therein "made the strong showing of necessity and desirability to compel the production of the records ..."

Krauss v Putterman, 50 AD2d 599 (cs 15) (2nd Dept. '75), was an action for an accounting arising out of a nursing home venture. Defendant demanded production of plaintiff's tax returns. The court found that the tax returns might be the only means by which an alleged unlawful transfer of funds by plaintiff could be established; thus the lower court was found to have properly granted inspection. However, the appellate court found that the defendants should not be permitted to inspect the returns without supervision. Plaintiff's motion for a protective order was granted to the extent that the production of income tax returns was to be supervised either by a justice of the Supreme Court, or by a referee whose expenses were to be borne equally by the parties, and that plaintiffs were permitted to block out all items contained in the income tax returns which were unrelated to income from the nursing home.

A legal treatise, 3A Weinstein-Korn-Miller, New York Civil Practice 3101.10, offers the following: "The lessons for counsel seeking tax returns are: precisely identify the particular information the return will contain and how that information will bear on specified issues in the case; explain why other possible sources of the same information are not accessible or not likely to be productive; if possible, examine those other sources before seeking a tax return; offer to limit the examination of the return to the particular relevant items of information."

In light of the above case law and treatise information, it is clear that Staff has not made a strong enough showing of necessity to justify requiring disclosure of Respondent's tax returns. Assuming the showing had been made, then questions on the necessity for supervising the disclosure, and who would be an appropriate supervisor, would have to be resolved first.